|There’s an old trading-related proverb that goes, “Sell in May and go away.”
It’s based on historical observations that the stock market at times seems to go through summer doldrums, with less growth in the third quarter than at other times of the year. And so, the notion goes, you should cash out of your market-based investments in the late spring and then buy back into the market in the fall.
Like most exercises where we try to identify a repeatable pattern among the markets’ chaos, if you look at enough data, you can “find” one. According to Money magazine, there is a kernel of truth to the old saying. Since 1926, stocks have returned only around half as much from May through October as they have the rest of the year.
However, the random and uncertain reasons why make this axiom unreliable at best.
Some attempted rationalizations for this data have suggested that it’s because the summer months are when most traders take their vacation, or the euphoria over Wall Street spring bonuses is over by then, or even that it’s simply a self-fulfilling prophecy.
Are There Problems With Taking The Summer Off?
The reasons not to follow sell-in-May are the same reasons you don’t want to try to time the market or pick winning stocks the rest of the year: it doesn’t work in the long run.
You simply don’t know when the rule will work against you: We looked at the summer performance of the S&P 500 over the past nine years. Gains ranged from -9.37% to +9.93%. For every negative period there were two positive periods. The average return rate during those periods was +0.92%. In your efforts to miss the summer slump you may miss out on your most significant gains of the year.
You don’t have anywhere better to invest: If you park your funds in a money market over the summer or buy short-term CDs, your investment is almost certain to shrink vs. the constant drag of inflation. Jumping into and out of short term assets is simply speculating. Adjusting your investing time horizon from decades to a few months and back again doesn’t represent a disciplined approach.
Buying and selling will cost you: Even if you can successfully time your jumps out of and back into the market, any extra gains you make will be eroded by trading expenses. Holding pat will help protect you from that.
Plan For Ups AND Downs
While the market will have periods where your investments won’t grow as rapidly or even lose value, in the long run there’s no better place to put your money to work.
Analyst Steve LeCompte ran a comparison of sell-in-May vs. buy-and-hold over the past 148 years. He found that those who used the seasonal strategy would have realized average annual gains of 4.8%, while those who stayed in the market would have earned an average of 8.9%.
According to LeCompte, selling in May only makes sense if you are CERTAIN you have a better-performing, alternative investment. But you really don’t. He found that even during the May-October stretch, stocks on average outpaced cash and bonds.
A truly diverse portfolio is designed to take advantage of market gains and spread the risk of periodic downturns among multiple asset classes all year round.
We can help you create a plan that’s best for your individual situation and goals, and then help you stick with it.